Innovate Corp (VATE) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the PRIMUS Telecommunications second-quarter financial results conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to your host, the Executive Vice President Mr. John DePodesta. You may begin, sir.

Thank you. Good afternoon, ladies and gentlemen, and welcome to PRIMUS' second-quarter 2004 financial results conference call and Web cast. I am John DePodesta, Executive Vice President of PRIMUS.

For those who have not had a chance to review the earnings release, it has been posted and can be viewed on our Web site at www.primustel.com. Joining me from PRIMUS today on today's conference call are Paul Singh, Chairman and Chief Executive Officer; Neil Hazard, Chief Operating Officer and Chief Financial Officer, and Tom Kloster, Senior Vice President, Finance.

We will begin with formal remarks from management regarding the Company's second-quarter 2004 performance and recent developments. This will be followed by the question and answer session.

Before we begin, please be advised that statements made by the Company during this presentation that are not historical facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to, revenue and earnings projections, statements of business plans and objectives, and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Form 10-K and 10-Q and other periodic filings with the SEC. These filings may be obtained from our Web site at no cost. The Company is not necessarily obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I will now ask Neil Hazard to review the results for the quarter.

Thank you, John, and good afternoon. Our second-quarter results reflect a very challenging telecom environment in all of our PRIMUS countries. We have experienced major competitive actions and anti-competitive actions by Telstra in Australia and by Bell Canada in Canada, both the monopoly incumbent carriers who are directly attacking our core long distance customer bases in those countries.

Our revenue declined sequentially from the Q1 level by $16 million to $332 million for the second quarter. Our foreign currencies weakened during the second quarter, which accounted for $11 million of this revenue decline. We also deemphasized our U.S. wholesale carrier business during the second quarter, which accounted for the other $5 million of the revenue decline from Q1. The good news is that our retail revenues were stable sequentially during the second quarter as compared to the first quarter.

Our mix of revenues remained constant from the first quarter at 56 percent residential, 25 percent business, and 19 percent other carriers. The good news is that our mix of data and Internet revenues rose to a new record high at 19 percent of total revenues as we continued to diversify from being a pure voice telecom carrier.

To combat these new competitive challenges, we have taken a number of steps to introduce new products and new bundled service offerings. In Australia we launched two new products, PRIMUS ONE and PRIMUS ONE Broadband, which bundled local services and Internet service for a fixed monthly price, along with metered PRIMUS long distance service.

In Canada, we launched local service for residential and business customers in June, and we just announced VMNO cellular service this week. This rounds out our product portfolio in Canada, along with VoIP services launched in Q1 and allows PRIMUS to compete with Bell Canada and other incumbent carriers' bundled service offerings.

In Europe, we continued to expand our cellular product offerings with both PRIMUS-branded handsets and local and long distance and international calling services. PRIMUS' total revenue from cellular services for the whole company in total grew to $5 million during the second quarter, which is 1.4 percent of our total revenue, up from $3 million in the first quarter. We are optimistic that cellular services will be a significant growth area for PRIMUS over the coming years in all of our countries.

Our net revenue less cost of sales as a percentage of net revenue -- what we used to call gross margin percentage -- increased in the second quarter to 40.0 percent. Our SG&A expenses increased $1 million during Q2 over Q1, which included approximately $4 million of spending on our new product initiatives, including VoIP and cellular services. We did achieve profitability of $1 million in the second quarter on an adjusted basis once you remove the foreign currency transaction loss of 14.7 million and the onetime loss on the sale of an asset of 1.9 million and the gain on debt repurchases.

We ended the second quarter with a total cash balance of $78 million. We generated a net of $20 million positive cash flow from operations during the quarter after spending $15 million to reduce our Accounts Payable to our telco vendors and other accrued expenses. We spent $8 million for capital expenditures during the second quarter, which left us with a positive free cash flow of $13 million for the quarter. We used 5.5 million of this free cash flow to repurchase our 8 percent and 12 3/4 percent senior notes in the open market, and our overall long-term debt was reduced by $6 million to $582 million at the end of June as compared to the end of the first quarter.

Our outlook for the remainder of the year is to have stable revenues during the third quarter based on June ending foreign currency exchange rates with a positive inflection in the fourth quarter. Adjusted EBITDA is suspected to be in the range of $29 to $31 million in the third quarter with a positive inflection in Q4. We expect an adjusted net loss of $6 to $9 million for the full year. Capital expenditures for the full year are expected to be in the range of $42 to $45 million, which will give us a positive free cash flow in the last six months of the year in the range of $5 to $10 million.

With that, I would like to turn the call over to Paul.

Thank you and thanks to all of you for joining us. Ladies and gentlemen, our second-quarter performance was solid and impressive, in many different ways fell short of expectations, both yours in ours. We have also revised our outlook for the remainder the year downward from our prior guidance. Our 2004 goals were to achieve 12 to 15 percent annual growth in revenues on a constant currency basis -- half from organic growth and half from acquisitions. Our revised revenue outlook on a constant currency basis puts us at approximately 7 percent total, total year-over-year growth 4 percent organic growth and 3 percent from acquisitions.

This is a respectable performance considering that the revenues of many of the long distance carriers are in a secular decline. However, after having met and exceeded expectations for more than 10 consecutive quarters, it was difficult but strategically imperative to modify our business plan in favor of long-term growth potential of PRIMUS.

I want to share with you our review of what changed during the second quarter, the rationale behind our adjustments and our strategy, and the reasons for my confidence and continued plans for success.

Let me first describe what changed during the second quarter. In the last two quarterly conference calls, we talked about the intense competition, pricing pressure, need for bundling services to increase ARPU and reduce churn, the adverse impact of wireless and Internet competition on the usage of wireline phones, and anti-competitive behavior by incumbent monopolies. Those factors remain in place, and I am sure that you have heard similar concerts from other competitors. In those previous conference calls, I had outlined our plans for a measured rollout of new initiatives as our competitive response.

What we did not foresee was the very sharp increase in the pace and intensity of the marketing campaigns by the incumbent carriers to promote their unlimited use of this bundle. What we also failed to predict was the same incumbent carriers would be under such intense pressure to grow revenue that they began promoting their services bundles to three long distance long distance services or almost three long distance services.

As you know long, distance service happens to be the foundation of our high margin core business. In hindsight, it is clear that we underestimated both the pace and intensity of increased competition in several of our markets. However, I can assure you that there is no underestimation in our strategic response.

I would like to share with you a bit of our decision-making process as we evaluated our options. As the magnitude of the threat to our core business became more apparent, we isolated two very viable strategic choices, each with diametrically opposite implications in the short-term and the long-term. The first choice was to live with the declining core revenues and to start cutting costs to preserve profit margins. And further, to slow down the rollout of our new initiatives to further save costs. This may have been the easier and more predictable choice and certainly would have been more in line with our existing aggressive net income guidance. However, it clearly would have resulted in putting PRIMUS into a secular revenue and profit decline in 2005 and beyond. Obviously a major departure from what we firmly believe is a tremendous growth opportunity for PRIMUS in this $100 billion plus market.

The second choice -- clearly the more broadband strategic of the two -- was to choose to defend our high margin core products by increasing our advertising and marketing efforts while at the same time accelerating the development, launch, promotion of the broadband VoIP, i.e. Lingo.com and TalkBroadband, wireless services and local services on the retail basis, and do this in the shortest possible timeframe, thereby putting PRIMUS on a level playing field with the competition with respect to offering bundles. We chose the second strategy because it's very clear to me and to our Board and to our management team that the long-term features of a one or two product wireline company is very limited indeed. I firmly believe that our approach is realistic, prudent and in the best interests of our shareholders.

Now let me address the reasons for my continued confidence in PRIMUS' future success. First, PRIMUS has never been financially stronger than we are today. We manage our company by using free cash flow as our performance metric, and in spite of the proposed investment in our new initiatives, we expect to generate free cash flow in the second half. We now have positive working capital. Our balance sheet is strong and getting stronger. We're keeping an eye on our SG&A expenses as a percentage of revenue. We realize that this percentage has been going up and may increase in the short-term because of the increased startup costs and increased marketing involved in our new strategic initiatives. But I can assure you that cost controls and cost-cutting options are all always available to us if we concluded that some of the new initiatives might not be to our expectations. As you know from our actions in 2001 and 2002, we are capable of moving decisively in cutting costs when and if appropriate.

Our strong financial position is the reason that we have confidence to refinance our entry into proposed new growth areas. However, had we been faced with the same two strategic choices just 12 months ago, I can tell you that I would have been forced to pick choice number one simply because we do not have the financial means to execute the strategic direction we have chosen today. Fortunately our financial discipline and focus on free cash flow has given us the opportunity to choose growth over decline.

Another reason for my confidence is that PRIMUS ha strong business franchises with well-known brand names in Australia and Canada. They are highly profitable to generate significant free cash flow. These franchises are perceived as strong challengers to the incumbent, and that makes them even more attractive. The size, scope and the performance of our Australia and Canada franchises fits the profile of our numerous investment bankers considered as ideal candidates for an IPO. We believe that these franchises are only increasing their market value over time. Our U.S. and European franchises are EBITDA positive, and we are taking actions to make them even stronger.

We fully expect our proposed investments in broadband VoIP under the brand name Lingo and in the wireless initiatives under the brand name PRIMUS Mobile to result in sizable business in the future with a significant market value on their own.

Another basis for our confidence is that our initiatives are already showing results even though it is quite early in began. The revenues from the new wireless and VoIP initiatives more than doubled to several million dollars in the second quarter, and I expect it to continue growing at a very fast pace.

Our PRIMUS-branded GSM cellular handsets have been very well received. We're focusing on signing up more of our handset owners for cellular services as well.

Our VoIP service had several thousand signups at the time of our last conference call. Now the total is more than 10,000 and growing.

And finally, my confidence is strengthened by the fact that this is not the first time we have repositioned ourselves in our ongoing battle to the incumbent. If memory serves me, this is the third or the fourth time in our 10-year history that our string of consecutive quarters are meeting and exceeding expectations has been sharply disrupted by competitive, regulatory or capital market related external factors. Each and every time that this happened our management team has faced the reality and taken quick broad steps, and often times it seemed unconventional, but only to emerge stronger than before. And you should expect nothing different.

I will now ask John DePodesta to make a few comments before opening the floor to questions.

Thank you, Paul. Paul has described why the new strategic initiatives represent a necessary investment for the Company. To highlight that point, I would like to describe the ll positive implications of this strategy by examining one of our major markets, Canada.

By the end of 2003, PRIMUS had become a well-known brand in Canada and was one of the most profitable telecom companies in that country. The vast majority of our business was residential long distance, which generated strong margins and cash flow. Although highly profitable, the long distance business only represented approximately 15 percent of the total telecom spending pie in Canada. While some market share growth opportunities existed in long distance, the major growth areas in the Canadian telecom market were local services, which constituted about 30 percent of the total telecom market spend, and wireless services, which was the fastest-growing and already commanded a 30 percent share. The remaining 25 percent of the market was for Internet and data services.

To began tapping these larger markets, we began planning last year for the introduction of PRIMUS local, wireless and broadband products and services. Then, earlier this year the competitive situation began to change significantly. The challenges came in two ways. Initially, and this occurred during the first quarter, large incumbent carriers drastically reduced their long distance pricing both for domestic and international calling. Billboards appeared across Canada advertising long distance rates as low as 2.5 cents per minute. This was a direct attack on our core long distance business.

The battle became more intense during the second quarter when the incumbents used long distance offerings as a loss leader to encourage customers to subscribe to their bundled local, cellular and broadband products. One such offering lured customers by offering 1000 minutes of long distance services for $5 per month if the customers signed up for a two-year contract for two other services including local, broadband and cellular. The nature of this competitive attack underscores why accelerated implementation of our strategic initiatives is imperative.

Our Canadian team has already responded with energy and alacrity, announcing the rollout of retail VoIP services for residential and small and medium-size businesses, the introduction of local sources, and just last week a cellular offering. Thus, in little more than six months, PRIMUS Canada has transformed itself from a predominantly long distance wireline carrier into a diversified carrier capable of offering bundled local, long distance, cellular, Internet and VoIP services. With this new arsenal of products and services, PRIMUS Canada can not only defend its profitable base of retail long distance customers, but can now begin to purchase in the deep revenue pools of local and cellular services that represent significant growth opportunities.

Thus, today PRIMUS Canada is better position to continue to succeed than it has ever been. In a real sense, this is what our strategy is all about.

Being able to anticipate and aggressively and creatively respond to market challenges is not a new experience for PRIMUS. In fact, telecom companies that lack those capacities are no longer among us. Investors who have been with us both before and since 2000 will painfully recall the meltdown of the telecom industry and the shutdown of the capital markets. PRIMUS reacted creatively and nimbly to those challenges to emerge as one of the few survivors.

The challenges we face today are of a different order, primarily competitive rather than structural. Yet we expect to prevail once again. Think about it. PRIMUS today is stronger than it has ever been. We have our strengthened balance sheet and liquidity position. We have positive working capital. All of our operating units are EBITDA positive, and we are generating positive free cash flow. Fortunately we have the strength and the capacity to make these necessary investments in our strategic initiatives that enable us to defend our profitable franchises while we expand our competitive capacities.

We will now begin the Q&A session.

(OPERATOR INSTRUCTIONS). Richard Klugman, Jefferies.

Thank you. I did not see anything in the release showing revenues by country or by region the way you used to report. Can you provide that to help us understand where the negative impact is showing up?

Just hold on a moment. We're getting the information.

It is Neil. We did not put that in, not consciously more unconsciously. But the percentages of the net revenue for the second quarter -- 35 percent was North America, 34 percent Europe, and 31 percent Asia-Pacific.

Okay. Did I hear -- just a housekeeping -- did I hear more than 10,000 VoIP customers?

The customers sign-up as stated last time I referred to as several thousand. Now the customer sign-ups have exceeded 10,000.

Is that Canada or both Canada and the U.S. and I think Australia as well?

No, I think they are basically Canada. These were real IP retail services in Canada and the U.S..

As of June 30th?

As of today. Just so we keep the conference call time. Stay consistent with it.

You have got a little meter running on your computer screen?

Otherwise it gets hard to (inaudible).

And where do you see that going since that is obviously the key, one part of the initiative to make this pivot?

I can tell you our experience has been very positive. It's a very exciting product. Customers who are using it they love the feature and functionality. We believe we have a superior product as compared to Vantage AT&T, and our pricing point is pretty good.

We wanted to make sure that we entered a little late in the sense of you know some advantage. We wanted to have a very compelling value, and we wanted customers to try our service. We are getting positive feedback, and when we get some new ideas and we are fixing or rather improving our background systems, automating them. So I think it is going very very well, and we're very excited about it. This is just the beginning. This is only the launch -- in the U.S., we launched June 15th or so. It is only six weeks.

You said in the press release also most of the new strategic initiatives are expected to be launched by the end of the year ago.

Right. Before the end of the year. Yes.

What are we talking about besides wireless resale and VoIP?

I think you know we are launching the same initiative as wireless, for example. Wireless in Europe is being expanded. You should expect that sometime before the year-end a wireless launch in the U.S.. Wireless has been launched in Canada. So it's basically wireless initiative being launched in three countries. Similarly voice over IP is being expanded, so that will continue to move into different countries.

On the local land, you know local businesses on a -- services on a retail basis are being introduced in different countries as we announced in Canada. You know we announced different initiatives on bundling, for example, in Australia. We launched PRIMUS ONE Broadband and PRIMUS ONE as a package. It is about $1000 Australian per year in ARPU, but 80 to 90 per month type. We're signing up thousands of customers, so we're pretty encouraged with the sale of PRIMUS bundles now in a competitive response to you know what Telstra did on the sale part.

So it's a number of initiatives being launched in multiple countries, and we think -- not we think -- we want to have them all developed and launched before the year ends. So as we go into 2005, you know then we can focus on sales and marketing of those.

Since you touched on Australia, John, I liked your runthrough of Canada. Maybe it would be helpful if you could take that same runthrough about how things have changed broader picture in Australia and the things that Telstra has done?

He said he liked your Canada apart. You know the progress we are making, could we make the same comment on Australia.

I think in Australia, number one, I think in some respects we were farther ahead in terms of our market positioning there. It really is franchise-rich as you know. There we already had a fairly rich mix of both voice and Internet businesses. We have over 500,000 ISP customers earlier this year. We also bought AOL's franchise there. We were the third-largest player in that market. That's a very rich margin business. So we're really combining voice and Internet services on a bundle basis for sometime in Australia. So we were ahead of the curve there.

Our wireless business in Australia has been relatively muted. We're reselling Telstra, but the terms of that arrangement are not desirable from our perspective, and we're looking for opportunities to expand with other carriers a wireless service in Australia.

I think those are some of the major points, and as Paul indicated, in terms of the local side, we have now rolled out the PRIMUS ONE and the PRIMUS ONE Broadband products linking local long distance, as well as broadband or dial-up Internet services in a bundle, and the reception has been quite positive.

I think the good news in Australia is that resell of local services as you would expect in most countries have low margins. And as in the bundle, you know local service has become a larger part of it, and so in the current business mix, the local revenues generate less margin. Similarly the mobile retail generate lesser margins. But as we proceed to deploy our own DSL infrastructure in Australia, that is going to give us opportunities to enhance those margins. So we already would have the revenue. But by bringing them on that, it well enhance our margins on DSL, enhance our margins on local. So I think that is a potential after we have invested in our DSL network. As we go in the future, that will enhance our EBITDA type of number.

Maybe if I could just ask in Australia, John, you gave some examples of some of the competitive efforts by the incumbent in Canada. What kind of offers are you seeing in Australia that has changed the competitive dynamic there?

Well, I think the most significant one was really in the DSL arena where Telstra towards the end of the first quarter this year came out and offered their DSL at about $29 price point, which was as to the retail market, which was below what it was charging resellers such as PRIMUS for that product. So basically squeezed any profit potential out of the resale opportunity. (multiple speakers).

We are not making money on every DSL customer we sign up, but it is more important for us to sign up DSL customers, even though we now, instead of making money for customers, we lose a little bit per customer because we know once we have our own infrastructure that knot will grow to positive.

And the other impact of that DSL pricing is it really narrowed the price range between the dial-up services which are generally priced in the $17 to $19 a month range so that people were now more attractive to migrate to the DSL broadband offering. That clearly had an impact on our ability to grow our dial-up services, which is a very margin-rich business. So it is a combination of impacts on our business.

That is helpful. If I could without hogging the time too much here, you mentioned the possibility again of Canada and Australia potential IPO opportunities. It seemed kind of an odd time to be talking about that considering the difficulties you have just described there and how in flux the business is. Is that something you're seeing near-term possibility or long-term possibility?

I think the one -- you know we see our business -- I just wanted to mention we do not overstate it too much the flux part of it. Some of the things have -- it is like all of the businesses came at the same time in the same quarters type of thing, and they are real issues for us you know to attack on our core business and we are trying to defend it by bundling services. So I don't want to minimize it. At the same ,time I also don't want anybody to think that our franchises in Australia, Canada, for that matter in the U.S. end Europe are falling apart or anything.

We have faced these things before, and just an example in Australia where John gave you. So for Australia Telstra wants to do, charge their retail more than what they are selling at, and (inaudible) regulatory body considers it anti-competitive behavior. In the past when these things have come, we have won a number of times and got paid direct (inaudible). So this is not the first time Telstra is doing any of these things.

So the franchise's basic value, we are defending our franchise. By defending it, we are doing the right thing. Just the example I gave you on PRIMUS ONE, PRIMUS ONE Broadband, we're putting our own infrastructure. We will compete with Telstra directly having our own cost base. So we see a lot of future positive coming out of these franchises.

Having said that, they do have -- this is how we invest money in our franchises. When we bought Australia, it was a company you know that made 2 percent gross margin. It was buying wholesale from Telstra and basically reselling it. We decided we would buy this and put our own networks and 2 percent we have now huge gross margin. It is very profitable, and we look at our investment and say, what the market value of this franchise? That is how we look at our business and say the investments we're making are sometimes you know they need to lay off and we look at our returns. So market values are there, and like I said, if Australia was to go public, from what I understand, it would enter the top on the Australian index.

Last question if I could. Neil, you gave a breakout of the second quarter, the 16 million delta, breaking it out -- 11 from currency, 5 from getting it out of carrier. What was the impact from acquisition because I think Magma and maybe was there anything else in there? Is there a way to normalize for acquisitions in figuring out I guess the retail apples-to-apples?

Yes, the only acquisition we had in the second quarter obviously was this Magma, which was a premier hosting data center company in Canada. The revenue in U.S. dollars was several million dollars. So it was not that large. And as you point out, the retail revenues from hosting offset some of the loss of residential retail customers in Canada and Australia due to Bell Canada and Telstra's pricing action. So on balance we came out even.

Steve Glenn (ph), Morgan Stanley.

I would like to spend a few minutes and walk through some liquidity issues which I think are of importance here. Number one, can you tell me have you repurchased any of your bonds post the second quarter?

Our bonds when? Subsequent to the second quarter?

You did the 5.5 million during the quarter. Was there anything subsequent to the quarter's close?

We don't comment on those matters. We basically said that from time the time we will evaluate the best use of our capital, including investment in the Company or reductions of debt, and we will report that when it is appropriate to do so.

Okay. The 12 million in restricted cash that's part of your cash balance, could you give a little more color on that? What is it restricted to, and is there the possibility to become unrestricted? Can you just give a little color on that cash balance?

Yes. Most of that is pledged as security for letters of credit that we have to put up. The largest one is the Telstra in Australia. So despite our cash balances and our size and revenues and profitability, they still demand a letter of credit to secure their local resale services to us. So that is what it is basically for. There are some others who are selected carriers in other countries also.

So you could hope that someday they realize that we are not a small startup company. We are solid and financially strong. We have been paying our bills to Telstra for 10 years, but hopefully they could in the future point they may be able to reduce that requirement. But that is what it is right now.

Okay. With regards to facilities, I know you have the new Canadian $42 million facility in Canada. Can you talk about potential uses of that facility, what you plan to use it for, and any restrictions with regard to covenant ratios or restrictions with sending the cash out of the Canada subsidiary, and if you have any other available AR or any other type of facilities?

To the facility you mentioned, right now we have not drawn anything on it, so it is zero. So it is dry powder for liquidity in case of emergencies. We do have several small covenants on cash balance in Canada and that sort of thing, but other than that, it is relatively unrestricted, and yes, we can draw upon it and spend cash home to the parent company. Again, no specific use for it right now. It is more dry powder and just having some cushion for liquidity in case we ever need it in the future.

For general corporate purposes.

As I think we point out in our remarks earlier, we don't have any near-term maturities of our long-term debt, and in a lot of ways, we are again much stronger now than we ever have been in the past.

Just to finish that off, too. While we don't have any AR facilities, we clearly have capacity under our existing indentures for some additional financing.

Okay. Just a follow-up there. If you exclude all the converts of senior and subordinate notes, there is about 52 million of other debt on the balance sheet comprised of a couple of half leases and some other issues. Can you give us what the near-term maturities are for some of those issues? I just want to try and get a handle about how meaningful that may be over the next, say, two years or so?

As you said, they are capital leases specifically, mostly for fiber-optic cable capacity that we own. So the way those work is we make monthly principal and interest payments to the party that owns the cable against that least. So it is an amortizing capital lease that over the next four to five years we will amortize down to zero. But it is a level monthly payment.

Okay. So it's a level monthly payment what you have been paying so far.

That is what we have been doing last year, and there is really no change from the past.

Okay. And I'm sorry, my final liquidity question, in the past you had talked about different options for taking out the 12 3/4. I think they are callable in October. I am just wondering if anything has changed what your potential options are to get rid of some of that high-cost debt?

I think no, we have the option on October 15th they become callable, and it is not necessarily on our priority list. We don't have to buy them, and they don't mature until 2009. So I think our business priorities are going to -- generally the initiatives are going to take those business priorities.

I'm sorry. Just one final question. Can you talk a little bit about what you are thinking with Canada and Australia? Any other potential asset sales that you would like to identify or you could think of?

No, I did not say asset sale. I said those are the kind of franchises that have a lot of value on their own. So I think they are for sale.

I'm sorry. Any other noncore assets that are easily identifiable that may make sense?

No, we have core assets in all of our franchises right now, generate positive EBITDA, and they are strong and getting stronger. Just Canada and Australia happen to be oldest franchises, so they are a little bit more advanced in years, and we expect the same thing to come from our other franchises. So they are all getting value and increasing in value, and they have a value on their own merit.

Just a follow-up thought on that, you left out PRIMUS Europe, which is pursuing the Vienna Mobile strategy, and we just saw recently that diverge in mobile in the UK was trying to do an IPO for $1 billion or so. We're doing the same services and in a lot of ways have better service than they do.

So all of these things -- at the end when we invest money, we do expect these to create value whether we take them public at sometime in the future or they get sold. But in any case, when we invest money, we expect a return.

Okay. Great. That really helps clear up some of the liquidity issues.

David Sharrett, Lehman Brothers.

I just wanted first to follow-up on one of the previous questions and just make sure I got it right. In your Canadian facility right now based on your second-quarter results or your expected third-quarter results, there would not be any violation of covenants on that facility?

Absolutely not. The only covenants we have as I mentioned were just a requirement to keep the cash balance. It is relatively small, so.

Okay. I just wanted make sure that was the only covenant. In terms of your third quarter and the expected decline in EBITDA, you talked about revenues being flat in the third quarter, but yet the expected EBITDA decline, is it safe to say that is entirely your marketing budget and that is all within the SG&A line, or is that through to the gross margin side as well?

David, I think it was a former. It is primarily in the SG&A, and we expect the gross margins to stay relatively flat.

So that would put you -- just looking at my numbers here -- somewhere around 102 million of SG&A versus the 95, and that is give or take? What is sort of a good run-rate SG&A level to use as we look out a couple of quarters?

I think that is in the ballpark.

And your expectations for a turnaround in the fourth quarter, how much of that is potentially easing up on SG&A versus some of these new products coming in, or is it just hope of easing the competition?

We hope certainly that these new products will start gaining traction in terms of revenue growth in the fourth quarter. So we certainly do expect a modest inflection and really on the new revenue side from these products. As we mentioned, assuming we are successful, they increase our ARPU per customer dramatically.

In terms of other uses of cash, what is your stance right now on acquisitions given this change in strategy? Are you going to hold off on acquisitions for now just to hold onto the cash position, or are you still in that mode?

In general we continue to look at acquisitions as long as they are accretive and free cash flow positive, and they would generate a good return for us. You know we are always on the lookout, and we do look at quite a few of them. I think it would be fair to say that right now we are all focused on just getting all of our initiatives launched and making sure that they become successful. It is not an either or type of situation. We continue to look at acquisitions.

Also, David, it may be an issue of degree. I mean certain acquisitions of smaller size involve customer bases that really are make or buy decisions, and whether or not you spend the marketing or advertising or whether or not you buy that customer base. So that is a trade-off issue.

In terms of potential small acquisitions or as you did in the second quarter further buybacks of your bonds in the open market, what is sort of a minimum cash position you always want to leave yourself with? What amount of flexibility do you think you have right now given your 66 million of cash, excluding the restricted portion?

You know with the working capital, as you know, we have now positive working capital, and as working capital gets more positive and we are taking care of some of the items we wanted to, I think that increases our flexibility of having lesser cash balances. But as I said in my remarks, we run the company with free cash flow positive as the metric. So there is more and more flexibility with every quarter.

And in terms of paying down or reducing your Accounts Payable, is that program done now with what you have done over the first six months, or is there more to go?

Well, we had given guidance back in February at the beginning of the year conference call that we expected to do devote $40 to $50 million to paying down Accounts Payable and accrued expenses for the entire year. And through the first six months, we have paid approximately $30 million of that, which has helped to bring our working capital from negative to positive as Paul mentioned.

There are still several carriers out there that we still have to settle with and bring current. So my expectation for the whole year is that we will -- yes, we will spend some more in the second six months, but will it be at the very low-end or even below the low-end of that guidance figure?

Is that in your free cash flow estimate?

Yes, it is.

I guess lastly, you have given the breakdown in terms of your revenues by geographic market. Would it be possible to break down your EBITDA and/or free cash flow by those same markets?

David, we have never traditionally done that. You can get some sense in the 10-Qs we do show the country separately down to operating income. But, as Paul mentioned, all of our countries are EBITDA positive and contributing.

Gary Jacobi, Morgan Stanley.

I would like to focus in on the very first part of your call, which was your two strategic options that you decided that you want to bundle. First of all, whose wireless service in Canada are you reselling?

I think Microcell.

Microcell, a national Canadian carrier.

And the other basic question is, why is your bundle going to be competitive against Bell Canada or Telstra who can provide everything -- local, long distance, high-speed data, wireless? What is your competitive advantage other than price?

Yes, I think the first step is just when we pick the two options, and then I will answer your other question. Was the option of not having a bundle versus just even having the option to offer one. So if you don't even offer anything and assuming even at the same price as the competitor is offering, then the customer is more likely to switch to the other carriers because we cannot even meet their needs. Pricing option comes second. So that's the one we wanted to address first.

Now comes to the second one, which is now we can bundle also different products within the bundle if they are getting, say, long distance for you know whatever, for 3 or for 1 cent a minute, whatever they want to do. With these new bundles, we can actually position products against our competitors, whereby they get the same long distance price, and we can offer them other services with some savings. Frankly, in Canada, we offer airline miles, which customers love those airline miles. So we don't need to actually match their reduction in prices, we just need to be competitive and offer them the full window.

Paul, it seems to me that with Microcell likely getting bought by Bell Canada, all that you're doing is reselling Telstra and Bell Canada. Why do you think that those guys are not just going to jerk around prices and make it exceedingly difficult for you to resell their products and services?

Okay. Let's assume so what other thing would you do? Not offer a mobile service? That is worse than -- at least this way, once we have the customers like in Australia, for example, how many choices are not just Telstra? How many choices are Telstra, Opti (ph), Vodafone? So more scale that you develop, once you have more and more customers, other margins are going to expand over time. That is one good thing about new project starts. When you start your margins -- actually margins are looking pretty good. So they are not you know very dilutive. They are not as high as our core products.

But as you get more customers, our leverage actually goes up because in each country and over time all the wireless carriers are going to look for companies like PRIMUS who can indeed sell their services and guess what? The margins for the resellers are only going to increase.

But why Telstra rather than Vodafone? Why are you choosing your primary competitor?

No, all of them are our competitors. That is like John mentioned to you we are now looking at -- we get prices from everybody. We don't just work with one carrier, so we're getting prices from everybody. We will pick and choose to maximize our margins and to grow our business.

Like your first question of taking the two choices, I said strategic choices. The first one I said is if you do not offer our customers, even offer the bundle, then we are -- you know where we just leaving ourselves so vulnerable to competition. So step one is get the bundle. Even though it may be margins may not be as high and may not be accretive to our current margins, it will be the case for most services, except for VoIP.

But once you have it, then the question is to try to sell those services, increase your scale, and we have proven this in Canada, in Australia, in Europe and the U.S. where we started with margins, and that is what happened over the last two or three years. So margins have grown by almost 1500 basis points.

Why? Because our scale went up and we can negotiate better there. That is how you --

Many people feel that VoIP is going to end up being a throwaway or a giveaway by the companies selling DSL or cable modem? How are you going to compete against that? Just like they are now throwing away long distance for nothing. Where is the value-added in VoIP services?

Well, I think you missed the part in the Canada part when we talked about our own DSL infrastructure in Australia, but not only -- we would have our own DSL, our own VoIP. We have a nationwide network of our own. Remember we have been competing with the carriers for years. This is not a new thing for us that we just woke up yesterday and said, how do we compete with them?

My fear is that they just woke up yesterday.

That is okay, too. Sometimes competition makes everybody better. I mean what happened in the last quarter and the things we're doing that is what in a way we're going to be a lot better offer by the year-end than we were last quarter. I have no doubt about it. So in a way, I am glad this happened. We will get transformed because of the competition. Otherwise we have gone in our measured way of doing it. So you cannot be afraid of competition, and telecom (inaudible). So this is what you have got to do.

Thank you.

At this time, I would like to turn the call back over to Mr. DePodesta.

Thank you. In closing I would like to announce that PRIMUS' management will be presenting at the following upcoming conferences to be held in New York City during September. On Thursday, September 9th, we will be appearing at the Kaufman Brothers Seventh Annual Communications, Media and Technology conference. And later in the month on September 23rd, we will be presenting at Jefferies Second Annual Communications and Media Conference. Hopefully we will see you there.

That concludes PRIMUS' second-quarter 2004 financial results conference call. Replay information can be found on our Web site at www.primustel.com. The replay will be available in about one hour. Thank you again for joining us today and good evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines.